Tax Planning for All Seasons

President Joe Biden has signed a new $1.2 trillion Infrastructure Investment and Jobs Act of 2021, while the Congressional Democrats continue to negotiate the final provisions of the separate, so-named “human infrastructure” spending bill. We are following the tax legislation closely and will provide updates and planning suggestions as final details of any changes are announced.

In the meantime, we wanted to share a list of some timeless tax-wise practices, many of which we focus on in our discussions with clients around this time each year:

• Maximize the use of tax-deductible retirement plan contributions each year to lower your tax liability as much as possible. The SECURE Act now permits savers to continue contributions to IRAs even after age 70½.
• Make annual or one-time gifts to family members to transfer taxable income and future gains from your portfolio to others, potentially reduce family-wide tax liability, and reduce your taxable estate during your lifetime.
• Gift appreciated securities held for more than one year directly to charities or to a charitable donor-advised fund (DAF). The tax deduction is based on the value of the gift, and tax liability for you on any built-in capital gains are eliminated.
• Concentrate multiple years of charitable deductions into one year to maximize the tax benefits of giving, using the technique of “charitable bunching.”
• Consider qualified charitable distributions (QCDs) from IRAs for those over age 70½, especially if you would not otherwise receive as advantageous a tax deduction for gifting taxable assets.
• Consider a Roth IRA or Roth 401(k) conversion or even discretionary distributions of IRA assets, especially if this will be a low-income-tax-rate year for you. If you have not already begun taking required minimum distributions from IRAs, one strategy we often recommend is to reduce or eliminate your traditional IRA assets before they kick in.

Throughout the year, we regularly look for opportunities to maximize after-tax portfolio returns beyond investment selection, allocation, and periodic rebalancing. We utilize these techniques in our client portfolios as part of our tax sensitivity in managing investment strategies:

• We aim to hold investments in taxable accounts for more than one year before selling them so that long-term capital gains rates will apply. The tax difference can be significant. (However, we always assess the potential risk and return tradeoffs that result from any decision to extend an investment holding period.)
• We seek to place the interest-earning portion of portfolios in tax-deferred accounts given interest income is taxed at the top marginal rate, unlike long-term capital gains.
• We consider carefully before selling investments with large built-in gains, unless the sale is justified by a higher expected return from another investment or is necessary to maintain portfolio asset allocation objectives.
• When raising cash in your portfolio, we do so by selecting securities or individual lots of a security that have the lowest taxable gain consequences.
• If there is market volatility throughout the year, as well as regularly during our year-end review, we look for opportunities to “harvest” capital losses. These realized losses can then be used to offset realized gains elsewhere within or outside the portfolio, and within the same tax year or rolled forward to future tax returns. In either case, proceeds can be placed in a comparable investment so the portfolio allocation remains intact.
• For portfolios without significant tax-deferred assets, we will generally recommend holding tax-exempt bonds in lieu of taxable bonds, depending on the client’s marginal tax rate.

We welcome the opportunity to discuss these planning topics with our clients and to coordinate with tax advisors to determine the best techniques for each tax profile. Please contact your Litman Gregory Advisor for more information and to review your situation.

Important Disclosure

This written communication is limited to the dissemination of general information pertaining to Litman Gregory Wealth Management, LLC (“LGWM”), including information about LGWM’s investment advisory services, investment philosophy, and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy.

There is no agreement or understanding that LGWM will provide individual advice to any investor or advisory client in receipt of this document. Certain information constitutes “forward-looking statements” and due to various risks and uncertainties actual events or results may differ from those projected. Some information contained in this report may be derived from sources that we believe to be reliable; however, we do not guarantee the accuracy or timeliness of such information.

Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.

Investing involves risk, including the potential loss of principal. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management feeds or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Nothing herein should be construed as legal or tax advice, and you should consult with a qualified attorney or tax professional before taking any action. Information presented herein is subject to change without notice.

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LGWM is an SEC registered investment adviser with its principal place of business in the state of California. LGWM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which LGWM maintains clients. LGWM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by LGWM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.